1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended July 1, 2001 Commission File Number 0-12016 ------------------------------ INTERFACE, INC. --------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1451243 ------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339 --------------------------------------------------------- (Address of principal executive offices and zip code) (770) 437-6800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Shares outstanding of each of the registrant's classes of common stock at August 9, 2001: Class Number of Shares ----- ---------------- Class A Common Stock, $.10 par value per share 43,732,024 Class B Common Stock, $.10 par value per share 7,088,503
2 INTERFACE, INC. INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Condensed Balance Sheets - July 1, 2001 3 and December 31, 2000 Consolidated Condensed Statements of Operations - Three Months 4 and Six Months Ended July 1, 2001 and July 2, 2000 Consolidated Statements of Comprehensive Income (Loss) - Three 4 Months and Six Months Ended July 1, 2001 and July 2, 2000 Consolidated Condensed Statements of Cash Flows - Six Months 5 Ended July 1, 2001 and July 2, 2000 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 13 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 </TABLE> - 2 -
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> ASSETS JULY 1, DECEMBER 31, 2001 2000 ----------- ----------- (Unaudited) <S> <C> <C> CURRENT ASSETS: Cash and Cash Equivalents $ -- $ 7,861 Accounts Receivable 187,058 204,886 Inventories 208,475 198,063 Prepaid Expenses 30,453 22,765 Deferred Tax Asset 13,191 13,533 ----------- ----------- TOTAL CURRENT ASSETS 439,177 447,108 PROPERTY AND EQUIPMENT, less accumulated depreciation 261,608 258,245 EXCESS OF COST OVER NET ASSETS ACQUIRED 254,719 264,656 OTHER ASSETS 71,769 64,840 ----------- ----------- $ 1,027,273 $ 1,034,849 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 89,458 $ 97,874 Accrued Expenses 92,681 107,467 Current Maturities of Long-Term Debt 682 808 ----------- ----------- TOTAL CURRENT LIABILITIES 182,821 206,149 LONG-TERM DEBT, less current maturities 181,650 146,550 SENIOR NOTES 150,000 150,000 SENIOR SUBORDINATED NOTES 125,000 125,000 DEFERRED INCOME TAXES and OTHER 25,204 29,551 ----------- ----------- TOTAL LIABILITIES 664,675 657,250 Minority Interest 4,258 5,164 Common Stock 5,802 5,831 Additional Paid-In Capital 217,065 218,261 Retained Earnings 242,521 241,400 Accumulated Other Comprehensive Income - Foreign Currency Translation (89,302) (72,952) Treasury Stock, 7,200 and 7,493 shares, respectively, at cost (17,746) (20,105) ----------- ----------- $ 1,027,273 $ 1,034,849 =========== =========== </TABLE> See accompanying notes to consolidated condensed financial statements. - 3 -
4 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE SIX ----- --- MONTHS MONTHS ------ ------ ENDED ENDED ----- ----- JULY 1, JULY 2, JULY 1, JULY 2, 2001 2000 2001 2000 -------- -------- -------- --------- <S> <C> <C> <C> <C> NET SALES $287,285 $323,725 $593,796 $ 616,943 Cost of Sales 204,387 226,180 421,980 430,732 -------- -------- -------- --------- GROSS PROFIT ON SALES 82,898 97,545 171,816 186,211 Selling, General and Administrative Expenses 71,476 76,144 143,289 146,587 Restructuring Charge -- -- -- 20,095 -------- -------- -------- --------- OPERATING INCOME 11,422 21,401 28,527 19,529 Interest Expense 9,298 9,834 18,862 19,118 Other Expense (Income) - Net 2 22 275 767 -------- -------- -------- --------- INCOME BEFORE TAXES ON INCOME 2,122 11,545 9,390 (356) Income Tax (Benefit) Expense 850 4,503 3,688 1,405 -------- -------- -------- --------- NET INCOME (LOSS) $ 1,272 $ 7,042 $ 5,702 $ (1,761) ======== ======== ======== ========= Basic Earnings Per Share $ .03 $ .14 $ .11 $ (.03) ======== ======== ======== ========= DILUTED EARNINGS PER SHARE $ .03 $ .14 $ .11 $ (.03) ======== ======== ======== ========= Average Shares Outstanding -- Basic 49,822 51,352 49,920 51,572 ======== ======== ======== ========= Average Shares Outstanding -- Diluted 50,471 51,355 50,739 51,572 ======== ======== ======== ========= </TABLE> See accompanying notes to consolidated condensed financial statements. INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> THREE SIX ----- --- MONTHS MONTHS ------ ------ ENDED ENDED ----- ----- JULY 1, JULY 2, JULY 1, JULY 2, 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Income (Loss) $ 1,272 $ 7,042 $ 5,702 $ (1,761) Other Comprehensive Income, Foreign Currency Translation Adjustment (5,727) (3,250) (16,350) (8,505) -------- -------- -------- -------- Comprehensive Income (Loss) $ (4,455) $ 3,792 $(10,648) $(10,266) ======== ======== ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. - 4 -
5 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> SIX --- MONTHS ------ ENDED ----- JULY 1, JULY 2, 2001 2000 ----- ----- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: $ (15,486) $ 9,482 ----------- ----------- INVESTING ACTIVITIES: Capital expenditures (17,293) (10,264) Acquisitions/Divestitures of businesses -- (25,000) Other (5,877) (518) ----------- ----------- (23,170) (35,782) ----------- ----------- FINANCING ACTIVITIES: Net borrowing (reduction) of long-term debt 38,479 32,047 Issuance/Repurchase of common stock (2,904) (1,602) Dividends paid (4,579) (4,663) ----------- ----------- 30,996 25,782 ----------- ----------- Net cash provided by (used for) operating, investing and financing activities (7,660) (518) Effect of exchange rate changes on cash (201) (140) ----------- ----------- CASH AND CASH EQUIVALENTS: Net change during the period (7,861) (658) Balance at beginning of period 7,861 2,548 ----------- ----------- Balance at end of period $ -- $ 1,890 =========== =========== </TABLE> See accompanying notes to consolidated condensed financial statements. - 5 -
6 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1 - CONDENSED FOOTNOTES As contemplated by the Securities and Exchange Commission (the "Commission") instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the notes to the Company's year-end financial statements contained in its Annual Report to Shareholders for the fiscal year ended December 31, 2000, as filed with the Commission. The financial information included in this report has been prepared by the Company, without audit, and should not be relied upon to the same extent as audited financial statements. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. NOTE 2 - INVENTORIES Inventories are summarized as follows: <TABLE> <CAPTION> (In thousands) July 1, December 31, 2001 2000 ---- ---- <S> <C> <C> Finished Goods $123,629 $101,411 Work in Process 39,884 40,939 Raw Materials 44,962 55,713 -------- -------- $208,475 $198,063 ======== ======== </TABLE> NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES During the second quarter of 2000, the Company acquired the furniture fabric assets of the Chatham Manufacturing division of CMI Industries, Inc. for a purchase price of approximately $25 million in cash and assumption of certain liabilities of approximately $13.8 million. The transaction was accounted for as a purchase and, accordingly, the results of operations have been included within the consolidated financial statements as of the acquisition date. NOTE 4 - RESTRUCTURING CHARGE During 2000, the Company recorded a pre-tax restructuring charge of $21.0 million. The charge reflects: (i) the integration of the U.S. broadloom operations; (ii) the consolidation of certain administrative and back-office functions; (iii) the divestiture of certain non-strategic Re:Source Americas operations; and (iv) the abandonment of manufacturing equipment utilized in the production of discontinued product lines. Specific elements of the restructuring activities, the related costs and current status of the plan are discussed below. U.S. Historically, the Company had operated two manufacturing facilities to produce its Bentley and Prince Street brands of broadloom carpet. These facilities, which were located in Cartersville, Georgia, and City of Industry, California, had recently been operating at less than full capacity. In the first quarter of 2000, the Company decided to integrate these two facilities to reduce excess capacity. As a result, the facility in Cartersville, Georgia, was closed and the manufacturing operations were relocated and integrated into the facility in City of Industry, California. A charge of $4.1 million was recorded representing the cost of consolidating these facilities and the reduction of carrying value of the related property and equipment, inventories and other related assets. Additionally, the Company recorded approximately $4.6 million of termination benefits associated with the facility closure. Between 1996 and 1999 the Company created a distribution channel through the acquisition of twenty-nine service companies located throughout the U.S. During 2000, the Company elected to divest of two of these businesses which had failed to achieve satisfactory operating income levels. As a result, a charge of approximately $7.6 million was recorded representing the reduction of - 6 -
7 carrying value of the related property and equipment, impairment of intangible assets and other costs to close or dispose of these operations. Europe Economic developments in Europe necessitated an organizational realignment. During fiscal year 2000, the European operations were reorganized in order to adapt to these changes. As a result, certain manufacturing, selling and administrative positions were eliminated. The Company recorded approximately $3.7 million of termination benefits related to this reorganization. A summary of the restructuring activities which were planned as of April 2, 2000 is presented below: <TABLE> <CAPTION> (In Thousands) U.S. Europe Grand Total - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Termination Benefits $ 4,637 $ 3,732 $ 8,369 Impairment of Property, Plant & Equipment 1,750 -- 1,750 Facilities Consolidation 2,358 -- 2,358 Divestiture of Operations, including Impairment of Intangible Assets 7,618 -- 7,618 ------- ------- ------- $16,363 $ 3,732 $20,095 ======= ======= ======= </TABLE> The restructuring charge was comprised of $11.9 million of cash expenditures for severance benefits and other costs and $8.2 million of non-cash charges, primarily for the write-down of impaired assets. The termination benefits of $8.4 million, primarily related to severance costs, resulted from an aggregate reduction of 425 employees through December 31, 2000. There will not be any further terminations as a result of the restructuring. The charge for termination benefits and other costs to exit activities incurred during 2000 was reflected as a separately stated charge against operating income. During the fourth quarter of 2000 the Company recorded an additional charge of $.95 million related to the terminations. During the first quarter of 2001, the Company completed the plan and the accrued liability was zero at April 1, 2001. NOTE 5 - STOCK REPURCHASE PROGRAM During 1998, the Company adopted a share repurchase program, pursuant to which it was authorized to repurchase up to 2,000,000 shares of Class A Common Stock in the open market through May 19, 2000 (since extended to May 19, 2002). This amount was increased to 4,000,000 during 2000. During the first six months of 2001, the Company repurchased 280,300 shares of Class A Common Stock under this program, at prices ranging from $6.02 to $9.44 per share. This is compared to the repurchase of 1,177,313 shares of Class A Common Stock at prices ranging from $3.41 to $8.94 during 2000. Total shares purchased under this program are 3,075,113 at prices ranging from $3.41 to $16.78. All treasury stock is accounted for using the cost method. NOTE 6 - EARNINGS PER SHARE AND DIVIDENDS Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of Class A and Class B Common Stock outstanding during the period. Shares issued or reacquired during the period have been weighted for the portion of the period that they were outstanding. Basic earnings per share has been computed based upon 49,920,000 shares and 51,572,000 shares outstanding for the six-month period ended July 1, 2001 and July 2, 2000, respectively. Diluted earnings per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all dilutive potential common shares that were outstanding during the period. Diluted earnings per share has been computed based upon 50,739,000 shares and 51,572,000 shares outstanding for the six month period ended July 1, 2001 and July 2, 2000, respectively. During the first six months of 2000, there were vested, unexercised, in the money stock options for 9,000 common shares. These shares were not included in the computation of the diluted per share amount for the respective period because the Company was in a net loss position and, thus, any such potentially outstanding common shares were anti-dilutive. - 7 -
8 The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the periods presented: <TABLE> <CAPTION> (In Thousands Except Per Share Amounts) Average For the Six-Month Shares Earnings Period Ended Net Income Outstanding Per Share - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> July 1, 2001 $ 5,702 49,920 $ 0.11 Effect of Dilution: Options -- 819 -------------------------------------------------------- Diluted $ 5,702 50,739 $ 0.11 ======================================================== ========================================================================================================== July 2, 2000 $(1,761) 51,572 $(0.03) Effect of Dilution: Options -- -- -- -------------------------------------------------------- Diluted $(1,761) 51,572 $(0.03) ======================================================== =========================================================================================================== </TABLE> NOTE 7 - SEGMENT INFORMATION During 1998, the Company adopted SFAS No. 131 which establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments: Floorcovering Products/Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial modular and broadloom carpet, and the Interior Fabrics segment manufactures panel and upholstery fabrics. The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of interest expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation. - 8 -
9 Segment Disclosures Summary information by segment follows: <TABLE> <CAPTION> Floorcovering Interior Other (Includes (in thousands) Products/Services Fabrics Architectural Products) Total - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Six Months Ended July 1, 2001 Net sales $ 445,676 $ 109,573 $ 38,547 $ 593,796 Depreciation and amortization 15,319 5,985 938 22,242 Operating income 23,088 5,107 (1,117) 27,078 Total assets 769,304 224,170 67,449 1,060,923 - ------------------------------------------------------------------------------------------------------------------------------- Six Months Ended July 2, 2000 Net sales $ 468,959 $ 115,377 $ 32,607 $ 616,943 Depreciation and amortization 13,967 4,834 638 19,439 Operating income 11,544 12,735 198 24,477 Total assets 803,585 255,027 48,396 1,107,008 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> A reconciliation of the Company's total segment operating income, depreciation and amortization and assets to the corresponding consolidated amounts follows: <TABLE> <CAPTION> Six Months Ended ------------------------------------------------- (in thousands) July 1, 2001 July 2, 2000 <S> <C> <C> DEPRECIATION AND AMORTIZATION Total segment depreciation and amortization $ 22,242 $19,439 Corporate depreciation and amortization 2,815 2,261 ---------- ---------- Reported depreciation and amortization $ 25,057 $21,700 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME Total segment operating income $ 27,078 $ 24,477 Corporate expenses and other reconciling amounts 1,449 (4,948) ---------- ------ Reported operating income $ 28,527 $19,529 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Total segment assets $ 1,060,923 $ 1,107,008 Corporate assets and eliminations (33,650) (80,765) ------------- ---------- Reported total assets $ 1,027,273 $ 1,026,243 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> - 9 -
10 NOTE 8 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS The Guarantor Subsidiaries, which consist of the Company's principal domestic subsidiaries, are guarantors of the Company's 7.3% senior notes due 2008 and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission. INTERFACE, INC. AND SUBSIDIARIES STATEMENT OF INCOME (LOSS) FOR THE SIX MONTHS ENDED JULY 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ ------------ ------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net sales $447,192 $ 188,118 $ -- $ (41,514) $593,796 Cost of sales 334,131 129,363 -- (41,514) 421,980 -------- --------- -------- --------- -------- Gross profit on sales 113,061 58,755 -- -- 171,816 Selling, general and administrative expenses 89,601 42,077 11,611 -- 143,289 Restructuring charge -- -- -- -- -- -------- --------- -------- --------- -------- Operating income 23,460 16,678 (11,611) -- 28,527 Other expense 7,617 5,277 6,243 -- 19,137 -------- --------- -------- --------- -------- Income before taxes on income 15,843 11,401 (17,854) -- 9,390 and equity in income of subsidiaries Income tax (benefit) expense 4,611 3,982 (4,905) -- 3,688 Equity in income of subsidiaries -- -- 18,651 (18,651) -- -------- --------- -------- --------- -------- Net income (loss) applicable to $ 11,232 $ 7,419 $ 5,702 $ (18,651) $ 5,702 common shareholders ======== ========= ======== ========= ======== </TABLE> - 10 -
11 BALANCE SHEET JULY 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS --------- ------------ -------------- ------------- --------- <S> <C> <C> <C> <C> <C> ASSETS (IN THOUSANDS) Current Assets: Cash and cash equivalents $ 4,273 $ 2,358 $ (6,631) $ -- $ -- Accounts receivable 148,642 79,654 (41,238) -- 187,058 Inventories 142,914 65,561 -- -- 208,475 Miscellaneous 13,072 37,875 (7,303) -- 43,644 --------- --------- --------- ----------- --------- Total current assets 308,901 185,448 (55,172) -- 439,177 Property and equipment less accumulated depreciation 172,521 72,436 16,651 -- 261,608 Investment in subsidiaries 89,157 1,496 906,063 (996,716) -- Excess of cost over net assets acquired 169,584 83,752 1,383 -- 254,719 Other assets 10,577 5,802 55,390 -- 71,769 --------- --------- --------- ----------- ----------- $ 750,740 $ 348,934 $ 924,315 $ (996,716) $ 1,027,273 ========= ========= ========= =========== =========== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 46,204 $ 44,811 $ (1,557) $ -- $ 89,458 Accrued expenses 52,189 27,464 13,028 -- 92,681 Current maturities of long-term debt 335 347 -- -- 682 --------- --------- --------- ----------- --------- Total current liabilities 98,728 72,622 11,471 -- 182,821 Long-term debt, less current maturities 6,500 44,900 130,250 -- 181,650 Senior notes and senior subordinated notes -- -- 275,000 -- 275,000 Deferred income taxes/other 14,672 4,013 6,519 -- 25,204 --------- --------- --------- ----------- --------- Total liabilities 119,900 121,535 423,240 -- 664,675 Minority interests -- 4,258 -- -- 4,258 Redeemable preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,802 (196,344) 5,802 Additional paid-in capital 191,411 12,525 217,065 (203,936) 217,065 Retained earnings 288,269 171,941 290,529 (508,218) 242,521 Foreign currency translation adjustment income (876) (63,524) (12,321) (12,581) (89,302) Treasury stock, 7,200,000 Class A shares, at cost -- -- -- (17,746) (17,746) --------- --------- --------- ----------- --------- $ 750,740 $ 348,934 $ 924,315 $ (996,716) $ 1,027,273 ========= ========= =========== =========== =========== </TABLE> - 11 -
12 STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ -------------- ------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net cash provided by (used for) operating activities $ 14,427 $(1,529) $(28,384) $ -- $(15,486) Cash flows from investing activities: Purchase of plant and equipment (14,014) (2,184) (1,095) -- (17,293) Acquisitions, net of cash -- -- -- -- -- acquired Other assets (2,169) (2,600) (1,108) -- (5,877) -------- ------- -------- -------- -------- Net cash provided by (used for) investing activities (16,183) (4,784) (2,203) -- (23,170) -------- ------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments) 1,560 4,919 32,000 -- 38,479 Proceeds from issuance/ repurchase of common stock -- -- (2,904) -- (2,904) Cash dividends paid -- -- (4,579) -- (4,579) -------- ------- -------- -------- -------- Net cash provided by (used for) financing activities 1,560 4,919 24,517 -- 30,996 -------- ------- -------- -------- -------- Effect of exchange rate change on cash -- (201) -- -- (201) -------- ------- -------- -------- -------- Net increase (decrease) in cash (196) (1,595) (6,070) -- (7,861) Cash at beginning of period 4,469 3,953 (561) -- 7,861 Cash at end of period $ 4,273 $ 2,358 $ (6,631) $ -- $ -- ======== ======= ======== ======== ======== </TABLE> - 12 -
13 NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (entitled "Business Combinations") and SFAS No. 142 (entitled "Goodwill and Other Intangible Assets"). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separately from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each accounting standard which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on December 31, 2001 (the first day of fiscal year 2002). The Company expects that the adoption of these accounting standards will result in certain of its intangibles being subsumed into goodwill and will have the impact of reducing its amortization of goodwill and intangibles commencing December 31, 2001; however, impairment reviews may result in future periodic write-downs. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This report contains statements which may constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Those statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed in the Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which discussion is hereby incorporated by reference, including but not limited to the discussion of specific risks and uncertainties under the headings "Strong Competition: The Company competes with a large number of other manufacturers in the highly competitive commercial floorcovering products market, and certain of these competitors have financial resources in excess of the Company's," "Cyclical Nature of Industry: Sales of the Company's principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings," "Reliance on Key Personnel: The Company's continued success depends to a significant extent upon the efforts, abilities and continued service of its senior management executives and its design consultants," "Risks of Foreign Operations: The Company's substantial international operations are subject to various political, economic and other uncertainties, such as foreign currency exchange restrictions," "Control of Election of a Majority of Board: The Company's Chairman, together with other insiders, currently has sufficient voting power to elect a majority of the Board of Directors of the Company," "Reliance on Petroleum-Based Raw Materials: Large increases in the cost of petroleum-based raw materials, which the Company is unable to pass through to its customers, could adversely affect the Company," "Reliance on Third Party for Supply of Fiber: Unanticipated termination or interruption of the Company's arrangement with its primary third-party supplier of synthetic fiber could have a material adverse effect on the Company," "Restrictions Due to Substantial Indebtedness: The Company's indebtedness, which is substantial in relation to its shareholders' equity, requires the Company to dedicate a substantial portion of its cash flow from operations to service debt and governs certain other activities of the Company", and "Anti-Takeover Effects of Shareholder Rights Plan: The Company's Rights Agreement, which is triggered if a third party acquires (without the consent of the Company) beneficial ownership of 15% or more of the Common Stock of the Company, could discourage tender offers or other transactions that would result in shareholders receiving a premium over the market price for the Common Stock." The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. - 13 -
14 General The Company's revenues are derived from sales of commercial floorcovering products (primarily modular and broadloom carpet) and related services, interior fabrics, architectural products and other specialty products. During the six month period ended July 1, 2001, the Company had revenues of $593.8 million and net income of $5.7 million, or $0.11 per diluted share, compared to revenues of $616.9 million and net loss (after giving effect to a restructuring charge) of $1.8 million, or ($0.03) per diluted share, in the comparable period last year. Results of Operations For the six-month period ended July 1, 2001, the Company's net sales decreased $23.1 million (3.8%) compared with the same period in 2000. The decrease was primarily attributable to (i) the decline of panel fabric sales to certain OEM furniture manufacturers, (ii) the focus at Re:Source Americas on increasing profitability which resulted in declining certain jobs with lower margins, (iii) reduced demand for steel panel products made by the Company's architectural products division, and (iv) the continued decline of the euro and British pound sterling against the U.S. dollar. Cost of sales, as a percentage of net sales, increased to 71.0% for the six-month period ended July 1, 2001, compared to 69.8% in the comparable period in 2000. The increase was primarily attributable to (i) the failure to fully absorb overhead expenses in the Company's manufacturing operations as a result of the decline in sales volume, (ii) the increase in the relative sales by the Company's architectural products division and Chatham operations, which historically have had lower gross profit margins than the Company's other businesses, and (iii) the energy situation in California which disrupted the Company's U.S. broadloom operations during the first half of 2001. Selling, general and administrative expenses, as a percentage of net sales, increased to 24.1% for the six month period ended July 1, 2001, compared to 23.8% in the same period in 2000. Despite the slight increase in selling, general and administrative expenses as a percentage of sales, those expenses in absolute dollars have declined slightly as a result of cost-cutting initiatives and other restructuring activities. For the six-month period ended July 1, 2001, interest expense decreased $.3 million compared to the same period in 2000, due primarily to lower LIBOR interest rates. Liquidity and Capital Resources The Company's primary source of cash during the six months ended July 1, 2001 was $38.5 million from long-term debt financing. The primary uses of cash during the six month period ended July 1, 2001 were (i) the increase in overall inventory balances and the reduction of accounts payable and accrued expenses, (ii) $17.3 million for additions to property and equipment in the Company's manufacturing facilities, and (iii) stock repurchases and dividends. Management believes that cash provided by operations and long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future; however, those factors discussed under the headings "Cyclical Nature of the Industry," "Strong Competition," "Risks of Foreign Operations," "Reliance on Petroleum-Based Raw Materials," and "Reliance on Third Party for Supply of Fibers," in particular, in Exhibit 99.1 could affect the Company's free cash flow. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a result of the scope and volume of its global operations, the Company is exposed to an element of market risk from changes in interest rates and foreign currency exchange rates. The Company's results of operations and financial condition could be impacted by this risk. The Company manages its exposure to market risk through its regular operating and financial activities and, to the extent appropriate, through the use of derivative financial instruments. The Company employs derivative financial instruments as risk management tools and not for speculative or trading purposes. The Company monitors the use of derivative financial instruments through the use of objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions with a rating of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. - 14 -
15 Interest Rate Market Risk Exposure. Changes in interest rates affect the interest paid on certain of the Company's debt. To mitigate the impact of fluctuations in interest rates, management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company maintains the fixed/variable rate mix within these parameters either by borrowing on a fixed-rate basis or entering into interest rate swap transactions. In the interest rate swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. At July 1, 2001, the Company had no interest rate swap agreements in place. The Company anticipates that for the second half of fiscal 2001 it will utilize swap agreements or other derivative financial instruments to convert variable rate to fixed rate debt. Foreign Currency Exchange Market Risk Exposure. A significant portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the U.S., Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and sells its products in more than 100 countries. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and many other currencies, including the euro, British pound sterling, Canadian dollar, Australian dollar, Thai baht and Japanese yen. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and vice-versa. Additionally, to the extent the Company's foreign operations with functional currencies other than the U.S. dollar transact business in countries other than the U.S., exchange rate changes between two foreign currencies could ultimately impact the Company. Finally, because the Company reports in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations can have a translation impact on the Company's financial position. To mitigate the short-term effect of changes in currency exchange rates on the Company's sales denominated in foreign currencies, the Company regularly hedges by entering into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. In these currency swap agreements, the Company and a counterparty financial institution exchange equal initial principal amounts of two currencies at the spot exchange rate. Over the term of the swap contract, the Company and the counterparty exchange interest payments in their swapped currencies. At maturity, the principal amount is reswapped, at the contractual exchange rate. The Company, as of July 1, 2001, recognized a $16.4 million increase in its foreign currency translation adjustment account compared to December 31, 2000 because of the weakening of certain currencies against the U.S. dollar and the transition to the euro as the local reporting currency in Europe. Sensitivity Analysis. For purposes of specific risk analysis, the Company uses sensitivity analysis to measure the impact that market risk may have on the fair values of the Company's market sensitive instruments. To perform sensitivity analysis, the Company assesses the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. The market value of instruments affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at July 1, 2001. The market values that result from these computations are compared with the market values of these financial instruments at July 1, 2001. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. As of July 1, 2001, based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the market value of the Company's fixed rate long-term debt would be impacted by a net decrease of $15.7 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of the Company's fixed rate - 15 -
16 long-term debt of $25.9 million. At December 31, 2000, a 150 basis point movement would have resulted in the same approximate changes. As of July 1, 2001, a 10% movement in the levels of foreign currency exchange rates against the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of the Company's financial instruments of $1.3 million or an increase in the fair value of the Company's financial instruments of $1.1 million. At December 31, 2000, a 10% movement would have resulted in the same changes. As the impact of offsetting changes in the fair market value of the Company's net foreign investments is not included in the sensitivity model, these results are not indicative of the Company's actual exposure to foreign currency exchange risk. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Collins & Aikman Litigation. On July 23, 1998, Collins & Aikman Floorcoverings, Inc. ("CAF") -- in the wake of receiving "cease and desist" letters from Interface demanding that CAF cease manufacturing certain carpet products that Interface believes infringe upon certain of its copyrighted product designs -- filed a lawsuit against Interface asserting that certain of the Company's products, primarily its Caribbean(TM) design product line, infringed on certain of CAF's alleged copyrighted product designs. The lawsuit, which is pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:98-CV-2069, sought injunctive relief and claimed unspecified monetary damages. The lawsuit also asserts other claims against the Company and certain other parties, including for alleged tortious interference by the Company with CAF's contractual relationship with the Roman Oakey, Inc. design firm, now known as David Oakey Designs, Inc. On September 28, 1998, the Company filed its answer denying all the claims asserted by CAF, and also asserting counterclaims against CAF for copyright infringement. The Company believes the claims asserted by CAF are unfounded and subject to meritorious defenses, and it is defending vigorously all the claims. Until recently (see below), discovery had been limited by Court order to matters relating to CAF's motion for preliminary injunction. Both the Company and CAF filed motions for partial summary judgment. A Court-ordered mediation in August, 1999 did not lead to a resolution of the disputes between the parties. On March 31, 2000, the Court granted partial summary judgment to the Company and David Oakey Designs on all but one of CAF's copyright claims, holding that David Oakey, not CAF, owned the designs that were the basis of those claims. On the remaining copyright claim, which involves the Company's very successful Caribbean product (and some derivatives), the Court denied both the Company's and CAF's motions for partial summary judgment, and also denied, without a hearing, CAF's motion for preliminary injunction on this claim. The Court ordered the parties back into mediation and stayed all activity in the case pending its completion. The mediation was held on May 23-24, 2001. The case did not settle at that time, but meaningful settlement talks have been continuing. If the case is not resolved, discovery will resume on the remaining claims in this case, including CAF's tort claims and the Company's and David Oakey's copyright infringement claims against CAF. The Company's insurers denied defense and indemnity coverage related to this matter under the Company's insurance policies, which annually would otherwise provide up to $100 million of coverage. On June 8, 1999, the Company filed suit against the insurers to challenge that denial. That lawsuit is pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:99-CV-1485. On January 20, 2000, the Company filed a motion for partial summary judgment to enforce the insurer's obligation to defend the Company against the claims by CAF. The insurer cross-moved for summary judgment on this issue. On August 15, 2000, the Court granted the Company's motion and denied the insurers' cross-motion, ordering the insurers to pay the Company's costs of defense in this action to date, and to pay these costs going forward. The insurers have begun complying with this order. These motions did not address the insurers' obligation to indemnify the Company in the event of a finding of liability against the Company. Both the CAF infringement lawsuit and the Company's insurance coverage lawsuit involve complex legal and factual issues, and while the Company believes strongly in the merits of its legal positions, it is impossible to predict with accuracy the outcome of either such litigation matter at this stage. The Company intends to continue its aggressive pursuit of its positions in both actions. Tate Litigation. On August 24, 2000, Tate Access Floors, Inc. ("Tate") filed suit against the Company's raised/access flooring subsidiary, Interface Architectural Resources, Inc. ("IAR"), alleging that a feature of IAR's popular Bevel Edge flooring - 16 -
17 panel infringes a patent held by Tate. On November 3, 2000, Tate filed a motion seeking a preliminary injunction to require IAR to cease manufacturing the Bevel Edge product pending resolution of the suit on the merits. On March 9, 2001, the court entered a preliminary injunction which permits IAR to continue producing and selling its current trimless flooring panel product, but which limits its ability to resume producing the previously abandoned Bevel Edge product configuration. IAR has appealed the preliminary injunction order to the Federal Circuit Court of Appeals, and has filed a request for re-examination of the Tate patent with the United States Patent and Trademark Office. The Company believes that IAR's Bevel Edge product does not infringe the Tate patent, that the Tate patent should be held invalid due to prior existing art, and that IAR's defenses to this action are meritorious. The Company intends to defend this action vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its annual meeting of shareholders on May 22, 2001. (b) Not applicable. (c) The matters considered at the annual meeting, and the votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, relating to each matter, are as follows: (i) Election of the following directors: <TABLE> <CAPTION> Class A For Withheld ----------------------------------- ------------------------------- <S> <C> <C> Dianne Dillon-Ridgley 37,044,350 3,110,473 June M. Henton 37,044,150 3,110,673 Christopher G. Kennedy 37,067,850 3,086,973 James B. Miller, Jr. 37,067,850 3,086,973 Thomas R. Oliver 37,067,850 3,086,973 Class B For Withheld ----------------------------------- ------------------------------ Ray C. Anderson 4,843,658 0 Carl I. Gable 4,843,658 0 Daniel T. Hendrix 4,843,658 0 J. Smith Lanier, II 4,843,658 0 Leonard G. Saulter 4,828,935 14,723 Clarinus C. Th. van Andel 4,843,658 0 </TABLE> (ii) Proposal to approve amendment to the Interface, Inc. Omnibus Stock Incentive Plan to increase by 2,000,000 the number of shares of common stock authorized for issuance under such plan: For: 33,720,432 Against: 11,145,830 Abstain: 132,219 (d) Not applicable. - 17 -
18 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report: <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- <S> <C> 3.1 Restated Articles of Incorporation (included as Exhibit 3.1 to the Company's quarterly report on Form 10-Q for the quarter ended April 5, 1998, previously filed with the Commission and incorporated herein by reference). 3.2 Bylaws, as amended and restated (included as Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarter ended April 1, 2001, previously filed with the Commission and incorporated hereby by reference). 4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of Common Stock of the Company. 4.2 Rights Agreement between the Company and Wachovia Bank, N.A., dated as of March 4, 1998, with an effective date of March 16, 1998 (included as Exhibit 10.1A to the Company's registration statement on Form 8-A/A dated March 12, 1998, previously filed with the Commission and incorporated herein by reference). 4.3 Indenture governing the Company's 9.5% Senior Subordinated Notes due 2005, dated as of November 15, 1995, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank of Georgia, as Trustee (included as Exhibit 4.1 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference); and Supplement No. 1 to Indenture, dated as of December 27, 1996 (included as Exhibit 4.2(b) to the Company's Annual Report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference). 4.4 Form of Indenture governing the Company's 7.3% senior notes due 2008, among the Company, certain U.S. 4.4 subsidiaries of the Company, as Guarantors, and First Union National Bank, as trustee (included as Exhibit 4.1 to the Company's registration statement on Form S-3/A, File No. 333-46611, previously filed with the Commission and incorporated herein by reference). </TABLE> (b) No reports on Form 8-K were filed during the quarter ended July 1, 2001. - 18 -
19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERFACE, INC. Date: August 15, 2001 By: /s/ Patrick C. Lynch --------------------------------- Patrick C. Lynch Vice President (Principal Financial Officer) - 19 -